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HEC Pharm (1558 HK) Summary

Core Content

HEC Pharm (1558 HK) is a Hong Kong-listed pharmaceutical company that is currently the only authorized manufacturer and seller of oseltamivir phosphate API in China, with granule and capsule forms. The granule form is exclusive to the paediatrics market, giving the company a competitive edge. The company has been experiencing strong growth in its major product, Kewei, with significant sales increases in key provinces such as Beijing, Tianjin, Hebei, and Heilongjiang. This growth is attributed to an expanded sales team and increased market penetration.

Main Points

• Growth Momentum: HEC Pharm is expected to maintain a strong growth trajectory in FY16E-18E, with Kewei sales projected to grow at 42%, 36%, and 32% respectively.
• Market Position: HEC Pharm's unique position in the paediatrics market and the regulatory tightening by CFDA are expected to limit competition in the short to medium term.
• Pipeline Products: The company has a robust pipeline including insulin glargine (phase III trial), insulin aspart (expected to start trials by end of 2016 or early 2017), and Yimitsvir phosphate (targeted for 2019 launch). These products are anticipated to provide long-term growth catalysts.
• Valuation: The company is currently trading at 12.4x FY16E P/E, which is considered attractive compared to H-share peers averaging at 16x. The target price (TP) is reiterating at HK$20.0, which implies a 15.5x P/E and a 0.5x PEG.
• Investor Sentiment: The TP is derived from averaging DCF and P/E methods, with DCF implying HK$19.6 and P/E implying HK$20.4.

Key Information

• Revenue Growth: HEC Pharm is projected to grow revenue by 28%, 27%, and 26% in FY16E-18E, significantly outperforming the average 15% growth of other H-share healthcare companies.
• Profitability: Adjusted net profit is expected to increase by 26.4%, 25.0%, and 24.4% in FY16E-18E, respectively.
• ROE and ROA: ROE is forecasted to rise from 12.1% in 2013A to 17.0% in 2018E, while ROA is projected to increase from 3.5% to 14.7%.
• Valuation Metrics: The company's P/E and P/B ratios are projected to decline over the forecast period, indicating potential value appreciation.

Financial Highlights

Risks

• Concentration Risks: The company's reliance on a few key products and markets could pose a risk if these products face regulatory or market challenges.
• SG&A Costs: Potential increases in selling, general, and administrative expenses may affect profitability.

Valuation Analysis

DCF Valuation

• Implied Share Price: HK$19.6 (based on WACC of 11.6% and terminal growth rate of 2%).
• P/E Implied Value: 15.2x for FY16E.

P/E Valuation

• High End: 17.7x P/E, implying a share price of HK$22.74.
• Mid Point: 15.9x P/E, implying a share price of HK$20.42.
• Low End: 12.0x P/E, implying a share price of HK$15.39.

Conclusion

The report reiterates a BUY recommendation with a target price of HK$20.0, based on the company's strong growth momentum, robust product pipeline, and attractive valuation metrics. The company is expected to outperform its peers in terms of revenue and profitability growth, and the current P/E ratio is viewed as undervalued compared to the market. However, the report acknowledges potential risks such as concentration and rising SG&A costs.